Although the tax reform bill is still in conference and hasn't been passed, and the final bill will require study in conjunction with a discussion with a real estate savvy CPA to understand its implications on my particular real estate question, I am hoping someone on this thread can weigh in with some general advice. Please excuse the long post.
My close friend's parents are "buy and hold" small time landlords with a 2 commercial (1 building has three units and the other is one contiguous space) and 4 residential properties they rent out. These properties are all held jointly by their parents in their parent's names only, but each property has good liability insurance and umbrella policies.
The parents structured ownership in their name only this way partly because they were not convinced that since they handle maintenance, tenant vetting, etc themselves., that LLCs were worth setting up for each property. That there wouldn't be a huge benefit to it. With such hands on management the corporate veil protection of an LLC could be easily pierced was part of the reasoning. However, one of the residential buildings is currently held in a partnership with the parents, and their two siblings.
There are no separate bank accounts for these properties and money is just being deposited into one account., which I think needs addressing. These buildings bring in good rent, are centrally located in a major city, are well kept, and were a side business for the parents when they were working. This year they retired and are living on rental income from these properties. They've never really been strict about all the itemized deductions as landlords they could be taking (travel expenses, repairs etc.) or used spreadsheets to track things like rent. They were basically accidental landlords, who worked hard at their other professions, who were lucky to have good tenants.
These building will pass down to the sibling ( my friend) and his brother as inheritance and will be 50/50 ownership. They would like to continue on managing them. The siblings are trying to get up to speed on being future landlords. They've created excel spreadsheets to track expenses and rent. Encouraged separate bank accounts. Kept receipts for maintenance to itemize deductions etc., but I am curious as to some suggestions for the most tax advantageous methods they should be transferred the siblings.
Should ownership be transferred via forming partnerships (or LLCs? or S Corps?) for the all properties currently held in name only while the parents are living or should they just wait until after their parents have passed to assume ownership (the properties are held in a revocable trust where the siblings would simply inherit them)?
In any case, once these properties are theirs solely, should they continue to be held in name only but with high insurance polices as they are now? Or in an LLC(s)? Or Series LLC? Or in an LLC elected to be taxed as an s corp? Basically what would be a tax advantageous set up?
Any tips on property management or other way for them to get up to speed on inheriting these buildings. and how they should prepare themselves, both from a management and tax perspective would be appreciated as well.
I know a CPA is going to need to wade into the nitty gritty, as this is a complex set of questions, but any general advice is appreciated. Thank you.
